Trim exposure to equity market as you age

If the downturns in the equity market are deep enough, it can cut a retirement portfolio in half

Dear Money Lady, My concern is with my financial advisor and the volatility he has had me in for years. I am now 79 and wonder if this should be changed.

My investments are mainly in equities: TFSA 83 per cent, RRIF 72 per cent, and US RRIF 99 per cent. I have questioned him before and have done well over the years. I feel I need another opinion.

Thanks

– Sue

Dear Sue, You are right, it is too high for someone in their 70s, it may even be too high for someone in their 50s.

I agree with your advisor: to take advantage of market growth, you must be invested in securities and equites. However I don’t agree that your advisor should have the above percentages in equities at your age.

This is far too risky, especially now.

The problems arise when we have downturn market swings and you are still withdrawing funds from your portfolio.

The cyclical trends that helped build your portfolio now can cause severe damage when assets are cashedin for retirement income. In fact, if the downturns are deep enough, it can cut your retirement portfolio in half.

A retiree should expect to endure between three to five downward swings to the equity markets during a typical 25-year retirement. This is why most retirees trim down their exposure to the equity market as they age.

If you are heavily invested in securities, you will need to have enough time to wait for the recovery without taking out funds when the market goes down.

The question is: can you reframe from routine withdrawals when you have a depressed portfolio?

Remember, you need all securities to stay in the portfolio to take advantage of the recovery. This is why it is better to use fewer volatile investments as you age and to lessen the exposure to securities.

Here are five tips to consider when investing in retirement.

1.Set up withdrawals from money market funds only. Do not choose fluctuating investments such as equity funds, income trust funds, balanced funds or even bond funds.

2.Distributions from mutual funds, income trusts, dividends and interest payments from bonds should accumulate in a money market fund instead of being reinvested.

3.Avoid rebalancing your portfolio too often. Frequent rebalancing causes significant damage to your portfolio. TIP: If your withdrawal rate is five per cent or less, it is better to rebalance once every four years (preferably at the end of the U.S. presidential election year).

4.Discuss withdrawal rates with your advisor and what you will need to do if your portfolio suffers a 10 per cent, 20 per cent or even 40 per cent loss.

Make sure you understand the products you are in to determine not just their potential, but also their risk. Consider Real Return Bonds (fixed assets with inflation protection) or high interest ETF (Exchange Traded Funds), saving accounts. Check out: evolveetfs.com.

5.Indexation and management costs will increase over time and will put pressure on the portfolio to have increased gains to break even. Determine how the advisor/firm are paid and make sure it’s worth it.

When it comes to securing your finances, try not to spend too much during the early years of retirement. You want to preserve capital and live more modestly.

Do not take on any large renovations, big ticket purchases or unnecessary expenditures that eat away at your base capital.

And make sure you do not retire with debt.

Good luck and best wishes,

Christine Ibbotson